Punishment where it belongs

After six months the fall-out from Tesco’s £263 million half-year profit overstatement still reverberates. The FRC now expects companies to give full and fair disclosure of how they account for income in the areas that brought Tesco into disrepute.

Ocado is the first to report under the new regime, yet its accounts give no figures for commercial income from suppliers. Its auditors, PwC, are also Tesco’s. Oh, and Sainsbury’s. And Morrisons’, where they have now replaced KPMG, who appear to have missed the fact, as reported by its Chairman in the latest Notice of AGM, that dividends paid since 2012 unlawfully exceeded the company’s distributable profits by reference to its last filed accounts.

And so on. Maybe the FRC could learn something from the Bank of England, which will in June recommend that criminal penalties be imposed on banks’ senior managers who fail to install proper controls. They, together with traders guilty of market rigging, sanctions busting, product misselling, money laundering and facilitating tax evasion, will be sent to jail. About time, too.

Fines imposed on companies may raise money for regulators and the Treasury, but justice is not served if the individuals responsible are left unpunished. The losers are always the shareholders.

If the executives are a fraud’s chief designers and beneficiaries, public humiliation, as a court of conscience rather than law, does not suffice. Losing the confidence of their peers was enough to lead the MPs trapped in the cash-for-access sting to fall on their swords despite pleading that they “broke no rules”. But in an arena such as banking, public odium is a meaningless sanction since expectations of simple honesty and integrity on the part of bankers have already waned to vanishing point.

public odium is a meaningless sanction

When giving evidence to the Treasury Select Committee on his personal convoluted tax arrangements, such as use of a Swiss bank account and a Panamanian company, HSBC’s Stuart Gulliver gave his assurance that they “broke no rules”. Well, maybe they didn’t, but that misses the real point: public perception.

Accounting’s historic contribution

The City’s status as a financial centre can stand no more shocks. Public frustration is further compounded when culprits who engineer such scams are paid bonuses worth millions out of falsely inflated, and dubiously audited, accounting profits. The IASB Chairman, however, continues to deny that existing models overstate bank assets and understate their liabilities.

The Basel Committee of the Bank of International Settlements, by contrast, acknowledges the contribution to the financial crisis of flawed accounting standards. It is in no doubt about the need for a new standard that reinstates prudence, ensuring that robust provisions are made for loan losses, and acknowledging that “fair value” is a dangerous measure when markets are illiquid.

Lenders are also to blame

Blindness to borrowers’ inability to honour their debts is equally pervasive in the sovereign realm. But imprudent lenders are equally culpable, especially when it is not their money they are lending. Who, for example, in their right mind would have watched Greece clock up liabilities of hundreds of billions of euros when it was obvious at the outset that default was inescapable?

you can’t enjoy German living standards without German productivity

Since the day that Greeks looked for a better standard of life by corruptly fudging entry into the eurozone, the IMF, European Commission and European Central Bank must have recognised that Greece’s economy – comprising a bloated state sector, unionised labour, extravagant welfare, unaffordable pensions, excessive regulation and corrupt tax collection – would not remotely be able to sustain sovereign debt repayments also. It seems that no one told the Greeks: you can’t enjoy German living standards without German productivity.

Oh, such basic lessons – yet still unlearnt. In 1921, when Germany failed to meet successive instalments of war reparations owed to the Western Powers, its Reichsbank had no option but to resort to the printing press. The result? Hyperinflation, under which the cost of a postage stamp rose to 5 billion marks. Just watch what happens when the ECB’s relentless quantitative easing leaves the euro’s credibility so low that public trust crumbles.